A recent report by Neil Barofsky, the special investigator for the $700 billion TARP program, criticizing last year’s AIG bailout has stoked suggestions that perhaps it’s time for Treasury Secretary Geithner to step down. My guess is that Geithner will indeed step down by the end of 2010, but that he will almost certainly step down too late.
The ideal time for a Geithner resignation might be in January, before Congress finalizes its financial reform package. President Obama presumably selected Geithner as Treasury Secretary due to his deep familiarity with the big Wall Street banks, and in order to maintain continuity with the Bush Administration’s response to the financial crisis. The Bush and Obama response centered on the use of ad hoc bailouts to fend off the possibility of a market-wide crisis. We now seem to have passed this stage of the crisis, and moved to the regulatory phase. The central problem with the administration’s financial reform proposals is that they are backward looking. They are designed to expand bank regulators’ powers, so that they can more easily effect the kind of bailouts that regulators pursued in 2008.
If Geithner stepped down in early January, he could announce (carefully avoiding the words “mission accomplished,” of course) that regulators have achieved the purpose for which he came to Washington, generally stabilizing the banking system. President Obama could then nominate a new Treasury secretary who played no role in the bailouts, and who is capable of thinking beyond them. Under the new secretary, the financial reform proposals could be dramatically revised, into a form that is less backward looking, looks less like another handout to Wall Street banks, and is more likely to generate enthusiasm in Congress. (A side note: in my visits to Washington this fall, I have been astonished by the depth of the bipartisan hostility to the Administration’s financial proposals; these debates are very, very different from the healthcare debate).
Unfortunately, I think Secretary Geithner will stick around until after Congress passes financial reforms in 2010, on the view that this too is part of the project for which he came to Washington. If he does, I fervently hope that he doesn’t get what he wants.